Monday, March 29, 2010

Chinese Vs Indian Consumer

China has been in spotlight for a long time. Edward Chancellor of GMO was even forced to raise "China's Red Flags", without registration available via The Pragmatic Capitalist. The legendary Russell Napier of CLSA Asia-Pacific Markets back in the beginning of March wrote:

Many investors ignore the order evolving out of India’s apparent chaos, while also failing to accept that China’s state-imposed order will one day decompose. This dynamic means that returns from Indian equities are likely to far surpass Chinese equities over the medium and long term.....

When it comes to economics, youth and inexperience, key drivers of consumption, are often more rewarding than the age and guile that brings conservatism and savings. Japan may not be a template for how poor financial returns have to be in an aging society, but it provides a warning of how poor they can be. The following histograms reveal two very different demographic outcomes for China and India.

Click on charts to enlarge, courtesy of CLSA Asia-Pacific Markets.

This one paragraph, if applied in general, serves quite well for long run:

The problem with forecasting price is that we are forecasting the product of a social activity. This is difficult because of the lack of fixed variables in a social system. Indeed, demographics may be the nearest things we have to a fixed variable when we look to the future, and long may it remain so. Now everybody knows that things happen painfully slowly in demographics, but they have the advantage of also happening with painful certainty. China will need to mobilise more savings to support its aging population, whereas India can focus on mobilising its savings to facilitate consumption. This too will change, but not for a very long time.

Youth is probably the key ingredient for a population moving towards a consumer society. The older generation in India and China remember the deprivations of a different age and the risks or apparent stupidity of borrowing to consume. However, the youth of both countries increasingly comes with less of such baggage. In an era of growth, debt is good or not bad, and higher living standards make debt less dangerous. Indian and Chinese households save more because they need to protect themselves from negative outcomes. Such negative outcomes are just less likely for those possessing youth, innocence and a bad haircut. India has a lot more youth than China; this will be a key strength in making the transition from mercantilism and will promote higher returns for investors.